Tieng anh summary: The impact of agency cost on firm performance: a comparison between stateowned and nonstateowned enterprises listed on Vietnam stock market.

The impact of agency cost on firm performance: a comparison between stateowned and nonstateowned enterprises listed on Vietnam stock market.The impact of agency cost on firm performance: a comparison between stateowned and nonstateowned enterprises listed on Vietnam stock market.The impact of agency cost on firm performance: a comparison between stateowned and nonstateowned enterprises listed on Vietnam stock market.The impact of agency cost on firm performance: a comparison between stateowned and nonstateowned enterprises listed on Vietnam stock market.The impact of agency cost on firm performance: a comparison between stateowned and nonstateowned enterprises listed on Vietnam stock market.The impact of agency cost on firm performance: a comparison between stateowned and nonstateowned enterprises listed on Vietnam stock market.The impact of agency cost on firm performance: a comparison between stateowned and nonstateowned enterprises listed on Vietnam stock market.The impact of agency cost on firm performance: a comparison between stateowned and nonstateowned enterprises listed on Vietnam stock market.The impact of agency cost on firm performance: a comparison between stateowned and nonstateowned enterprises listed on Vietnam stock market.The impact of agency cost on firm performance: a comparison between stateowned and nonstateowned enterprises listed on Vietnam stock market.The impact of agency cost on firm performance: a comparison between stateowned and nonstateowned enterprises listed on Vietnam stock market.The impact of agency cost on firm performance: a comparison between stateowned and nonstateowned enterprises listed on Vietnam stock market.MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY Le Hoang Yen Khanh THE IMPACT OF AGENCY COST ON FIRM PERFORMANCE A COMPARISON BETWEEN STATE OWNED AND NON STATE OWNED ENTERP.

MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

-Le Hoang Yen Khanh

THE IMPACT OF AGENCY COST ON FIRM PERFORMANCE: A COMPARISON

BETWEEN STATE-OWNED AND

NON-STATE-OWNED ENTERPRISES LISTED ON VIETNAM STOCK MARKET

Major: Finance and Banking Reference: 9340201 

SUMMARY OF DOCTOR OF PHILOSOPHY IN

ECONOMICS

Ho Chi Minh city - 2022

The PhD dissertation has been accomplished at:

Academic supervisors: Dr Pham Phu Quoc; Dr Tran Phuong Thao

First reviewer:

Second reviewer:

Third reviewer:

Dissertation will be defended for academic committee’s assessment at: University of Economics Ho Chi Minh city ………

At…… ………… on ………

PhD dissertation will be searched at:

Vietnam National Library;

Library of University of Economics Ho Chi Minh city

CHAPTER 1 INTRODUCTION

1.1 PRACTICAL RESEARCH CONTEXT

In the 20th century, Vietnam has witnessed significant innovation that has changed itswhole economy as well as its residential lifestyle Vietnam’s economy was transformedfrom a centrally-planned to a market economy with a "socialist orientation" at its SixthNational Congress in 1986 under a renovation program, known as "Doi moi," whichsupported bringing impressive development to the whole country After the reformationpolicy in 1986, Vietnam's economy entered a new era of development and integration inwhich state-owned enterprises (SOEs) play an important role in leading the wholecountry in the new development period However, during the process of industrializationand modernization, 100% state-owned companies show signs of ineffective operationsand suffer long-lasting losses in production This situation causes a big burden on thegovernment and the whole country For that reason, at the beginning of the 1990s, theprocess of equitizing state-owned companies was under experimentation

In 1992, the Vietnamese government officially introduced the equitization campaign ofstate-owned companies to improve their operating productivity compared withcounterparts in the region and worldwide Over the past nearly 30 years, the originalnumber of around 12,000 state-owned enterprises in the 1990s of the 20th Century hasbeen downsized to approximately 5,600, with around 800 companies still having 100%state capital However, state-owned companies in Vietnam are still commanders in theeconomy since they control the key industries as well as hold and manage a total of morethan 3 million billion VND (Quach, 2016)

In addition, industrialization and modernization processes have also been undergone toupgrade the economy Thereby, Vietnam has needed huge capital for investment frominternal and external resources to maintain stable economic growth as well as restructurethe economy in the new era External capital is becoming more and more difficult toattract because Vietnam needs to compete with other neighboring countries in the regionwith similar conditions, like China, Malaysia, Thailand, etc Therefore, there is an urgent

demand for internal capital from the public through the establishment of a stock market

in Vietnam to mobilize capital both within and outside the country for economicinvestment nationwide In addition to the equitization process of state-owned enterprises,the development of the private sector provides up to 40% of GDP and 30% of thenational budget (Le, 2018) Along with the inauguration of the stock market, it wouldprovide the country with a more open and healthier business environment

The establishment of the two trading centers and then later transferred to stockexchanges in Vietnam and Upcom (Unlisted Public Company Market) facilitated notonly the equitization of state-owned enterprises but also the listing of both SOEs andother non-state-owned enterprises or private-owned enterprises When companiesbecome public and get listed on the stock market, they have expanded in scale andcomplexity in association with alternation of ownership to the public of shareholders thatneed outside expertise to run the business effectively In practice, investors puttingabundant capital into a company employ experts – the Chief Executive Officer (CEO) –

to help them run the business On the one hand, the separation of ownership andmanagement helps to resolve the conflict between having capital and running a business;

on the other hand, inefficient corporate performance can be triggered by interest conflictsbetween owners and managers, as both want to maximize their benefits Whileshareholders want to increase their wealth and firm performance, managers are eager for

a salary, allowance, and bonus In addition, the second reason is information asymmetrybetween managers and owners of a company’s assets and performance, sinceprofessional managers daily operate the business and know their own target, attempt, andhave confidential information that is difficult for public investors to approach andunderstand

In the context of Vietnam, the above-mentioned subjects trigger some issues that need to

be carefully considered At first, the controversy appears whether the interest conflict andinformation asymmetry between managers and shareholders are really harmful to bothshareholders’ benefit and firm performance Moreover, the country has been undergoing

an equitization process with a dominant role of state ownership in key industries andinvolvement in listed firms, as well as the growing role of the private sector in theeconomy, which places the government in a dilemma of how to allocate scarce nationalresources between the two sectors for optimal economic development In addition, the

theme of to what extent of state participation in the prominent sectors and listed firmswhich plays an encouraging role for the whole economy is an inspiring phenomenonbecause it is unanswerable The first issue has already been mentioned in academicliterature and is known as the agency problem between owners and managers, orprincipal and agent Therefore, agency costs arise in addition to daily operating costs tosustain the relationship between the parties in the companies, and they may have acertain influence on firm efficiency As for the second occurrence, in academic society,the role of state ownership has also been referred to with contrary and inconsistentevidence This topic needs further research to make some contributions to the academicliterature as well as propose some practical solutions for practitioners and policy makers.

1.2 RESEARCH MOTIVATIONS

The above-mentioned practical phenomena in the Vietnamese context inspire the author

to pay special attention to the impact of agency cost and state ownership Furthermore, inacademic society, the scarcity and inadequacy of empirical evidence on the effect ofagency cost on firm performance, as well as the impact of state ownership on firmperformance in transitional countries, particularly in Vietnam, are the impetus for thisresearch

Because agency costs and their impact on firm performance are critical issues in finance,some theories mention this relationship Agency costs are the result of managerialactions that can be interpreted using agency and stewardship theory Agency theory, asspecified by Jensen and Meckling (1976), Arnold (1985), and Jensen (1986), deals withtwo parties, including the management and stockholders, in such a relationship that theformer works on behalf of the latter The task of management is to operate the companies

on the shareholders’ behalf in an optimal way (Jensen and Meckling, 1976; Alabdullah,2013) When management with a large stake in the company does a good job and devotesthemselves to the company, interest conflicts between owners and managers disappear.Nevertheless, when the ownership structure is scattered over a number of investors,which will trigger the benefit disagreement occurring between managers andshareholders, as the latter would like to witness the increasing corporate performance,whereas the managers’ benefit is related to salary, bonus, and allowance (Jensen andMeckling, 1976)  Furthermore, information asymmetry worsens the relationship as the

managers who run the business have confidential information that is inaccessible orincomprehensible for public investors Therefore, the interest conflict and informationasymmetry between the principal and agent are mentioned as sources of the agencyproblem Thus, agency costs will occur to balance the difference and maintain the agent-client relationship effectively.

On the other hand, another contrary theory argues a different view of managerial actionfrom agency theory and can be named stewardship theory (Silverman 1970; Etzioni1975; Barney, 1990; Donaldson et al., 1991) According to this theory, the executivemanager wants to work for the business and be a good steward of the corporate assets.Thereby, there is no inherent, general problem of executive motivation as reckoned bystewardship theory since managers have a sense of achievement and responsibilityleading to nearly no agency cost Given the nonappearance of stimulating problemsamong executives, the phenomenon of how far executives can achieve optimal corporateperformance Therefore, the efficiency variations come from whether the corporatestructure facilitates effective action of the executive The issue becomes whether or notthe organization structure helps the executive to implement plans for high corporateperformance Specifically, structures will be facilitative of this goal to the extent thatthey provide clear, consistent role expectations and empower senior management

Concerning empirical evidence, research to date has focused on various aspects ofagency cost However, there is limited research explaining the relationship betweenagency costs and firm performance comprehensively Concretely, studies linking agencycosts with firm performance only attempt to identify the determinants of firmperformance, including board committee, industry, group affiliation, capital structure,and corporate governance (Ciftci and Tatoglu, 2019) Furthermore, the literatureexamining the effect of agency costs on firm performance often focuses on managerialownership, foreign ownership, ownership concentration, and management compensation(Alabdullah, 2013; Alfadhl, 2013; Trinh, 2017) Almost no empirical research previouslyhas been conducted to examine the impact of state ownership on the relationship betweenagency costs and firm performance Meanwhile, state ownership is common intransitional countries due to the privatization process and partly due to the nature itself

As a result, one of the primary goals of this study is to gain an understanding of the

impact of agency costs on firm performance during the privatization process with the participation of state ownership in listed firms.

Generally, a wide range of philosophies and research have investigated state-ownership.Nevertheless, the influence of state-ownership on firm performance has not beencomprehensively clarified by any single theory Moreover, mixed and diversifiedoutcomes in empirical studies on this rapport imply that it is subject to specificsituations In addition, while most empirical research regarding state-ownership assumesthat state-ownership impacts negatively on firm performance (Konings, 1997; Lin, Ma,and Su, 2009; Tran et al., 2014), some studies have discovered a positive rapportbetween state-ownership and firm performance (B.-B Jiang, Laurenceson, and Tang,

2008; Le and Buck, 2009) Thus, it is reckoned that there are still contradictory and

inconsistent empirical studies on the influence of state ownership on firm performance, particularly in developing and transitional countries, which stimulate new research on the rapport between state ownership and firm performance.

Vietnam’s economy has been in a transition process from a centrally-planned to a marketeconomy under "socialist orientation" It is worth noting that, despite accounting for only0.4 percent of total enterprises, SOEs account for 28.8 percent of total capital,contributing 20% to the country's GDP (Nguyen and Ramachandran, 2006; Phang,2013) For that reason, the economy is still dominated by the state, but the role of thesupplementary private sector is acknowledged and is on the way to developing to ahigher level as the country is opened up to foreign investment and internationalintegration With these typically distinguished features different from other transitionaleconomies, the Vietnam context deserves further research on economic issues in generaland agency costs in particular in maintaining firm efficiency in the prominent context ofprivatization

1.3 RESEARCH OBJECTIVES AND QUESTIONS

This study has three major objectives based on the literature gaps discussed in the abovesection The first one is with a view to inspecting whether the agency cost of state-ownedfirms is higher than that of non-state-owned enterprises The second objective is to figureout the different effects of agency costs on the firm performance of two groups of

companies And finally, the research examines the rapport between state-ownership andfirm performance under a privatization perspective Thereby, the three research questionsare developed as per below to fulfil the research objectives:

RQ1: Is the agency cost of SOEs higher than that of non-SOEs/POEs?

RQ2: Is there a difference in the impact of agency costs on the firm performance of two groups of enterprises?

RQ3: Is there a relationship between state-ownership and firm performance?

1.4 RESEARCH CONTRIBUTIONS

This research may contribute to theory, methodology, together with practice Itcontributes to the literature of agency cost in transitional economies with typicalcharacteristics of a market economy with a "socialist orientation" in which the state stillplays a dominant role in controlling the whole country Furthermore, it extends theexisting agency cost literature by directly comparing the agency costs of state-ownedenterprises (SOEs) and those of non-state-owned companies in an empirical study,because in a transitional economy like Vietnam, besides the public sector, the privatesector has also seen phenomenal growth Furthermore, it may be the first to thoroughlyinvestigate the agency cost in every aspect of two groups of publicly traded companies.Moreover, this research might provide evidence for a better explanation of therelationship between agency cost and firm performance of two separate kinds ofenterprises

What is more, it seems to be the first to find out the proportion of state-ownership thatmakes firm performance turn from negative to positive to propose some reference andpolicies for the government Additionally, from the results of control variables, the studyfinds the negative conjunction between capital structure and firm performance intransitional and emerging countries like Vietnam, in order to suggest some practicalsolutions for policy makers and practitioners

Moreover, it uses the latest databases and several proxies for agency cost as well as firmperformance across two groups of companies to improve the previous literature.Furthermore, unlike previous research that only measured state ownership with dummy

variables, this study applied both dummy variables and the concrete proportion of sharesowned by the state as a proxy for more comprehensive analysis Finally, the instrumentalvariable GMM is also applied to strengthen the results and ensure reliability of thefindings.

CHAPTER 2 LITERATURE REVIEW

2.1 AGENCY COST AND FIRM PERFORMANCE: THEORY AND EVIDENCE

2.1.1 Agency cost in business operation

The agency theory and stewardship theory are mainly used to interpret the manager'smotivation in running the business with contradictory arguments The agency theory(Berle and Means, 1932; Alchian and Demsetz, 1972; Jensen and Meckling, 1976; Fama,1980; Fama and Jensen, 1983; Jensen, 1986) states that shareholders hire agents to runthe business for their own benefit and firm efficiency (Ferris and Yan, 2009) The reason

is that managers employed by the shareholders have inconsiderable shares in thecompanies, together with the inconsistent interest between owners and managers Asmanagers could be more facilitated to run the business in favor of their own self-interestbut at the owners’ expense Thus, the more dispersed the ownership structure, the moresevere the agency problem, which is detrimental to shareholder benefit and firmperformance (Jensen and Meckling, 1976),

Regarding agency problems, agency theory addresses other disputes of control betweenmanagers and owners owing to information asymmetry (Jensen and Meckling, 1976).Accordingly, top management provides information in the business operation reportswhich is expected to reflect a good and real condition of work progress In contrast, thisinformation is unreal and deformed by management to make decisions in their owninterests (Myers and Majluf, 1984; Harris and Raviv, 2010) Therefore, the managerscould take advantage of their privilege of operating information in favor of their owninterest at other owners’ expenses in both pecuniary and non-pecuniary forms

However, on the contrary to the agency theory, the stewardship theory (Donaldson et al.,1991) explains the managers’ motivation for being opportunistic As managers havestimulation, all of their actions are in favor of corporate efficiency Furthermore,managers also have other positive intentions, such as a sense of showing their effort,ability, and responsibility (Etzioni, 1975; Donaldson et al, 1991)

2.1.2 Impact of agency cost on firm performance

Empirical studies on agency costs offer dispersed outcomes and results As claimed byagency theory, managers normally seek their own personal objectives as well as thehighest bonuses and perks possible (Jensen and Meckling, 1976; Denning, 1993) instead

of optimizing firm performance Therefore, they likely prefer decisions that lead them tomaximize their own perceived self-interest Thereby, managers tend to overridecorporate concerns and recommend higher discretionary expense accruals in order tomaximize their bonus potential (Beaudoin and Dang, 2012) Furthermore, agencyconflict can also be more noticeable in companies where the owners are liable with alltheir assets for the actions of partners (Michalskia, 2015) with little control and attention

In addition, agency costs are increasing in accordance with the number of non-managershareholders However, they are lower with elevated monitoring by banks (Ang et al.,2000)

Three determinants of management behavior are used, namely management ownership,financial leverage, and information asymmetry, to study the relationship betweenmanagement behavior and agency cost (Alabdullah, 2013) It is finally found that there is

a notable rapport between management ownership and agency cost As the ownershipincreases, the agency cost will decrease accordingly, because the managers consider thecompany’s assets as their own and work efficiently to maximize both their wealth andthe whole company’s (Alfadhl, 2013)

Firm performance is a vital indicator of how the market ascribes value to a company aswell as a thermometer to analyze the company’s financial health for potential investors toconsider their investment in the enterprise Therefore, companies with better firmefficiency would enjoy a better financial position and be more profitable for prospectiveinvestors To improve corporate performance, it is necessary to figure out determinants

to foster them in an optimistic way Corporate governance is considered to have arelationship with firm performance (Vo and Nguyen, 2014) Corporate governance ismeasured by a set of variables, including the dual role of the CEO, the board’s size,board independence, and ownership concentration Firstly, the dual role of the CEO hastwo sides of effect On one hand, it can be positively correlated with firm performance(Vo and Nguyen, 2014) However, it may deteriorate firm performance due tooverlapping functions between running the business and supervising it (Hsu and Lin,2019)

2.1.3. Different relationship between agency cost and firm performance in SOEs and non-state-enterprises.

2.1.3.1 Agency cost and firm performance in SOEs

It is reckoned that companies with high state ownership usually show up by investing ineven unprofitable projects and are passive in managing their investments, leading to

"over-investment" (Xu et al., 2002; Hea and Kyaw, 2018) In addition, managers tend toexpand the firm size by even investing in no-money-making projects for their personalinterests, leading to higher agency costs in comparison with their effort to invest inprofitable projects (Jensen, 1986) In turn, this investing decision reduces the assetturnover ratio, figuring the efficiency of utilizing the asset to create sales for the firm,which finally deteriorates firm performance In developing countries, state involvement

is prevalent in formerly state-owned enterprises (Sun and Tong, 2002; Yu, 2013; Lai,2018) Furthermore, increased state ownership leads to increased management costs andlower firm profitability (Xu et al., 2002; Zhu et al., 2019) State ownership is considered

to impact negatively on firm performance due to effortless access to the capital market,which leads to loose and inefficient control mechanisms (Xiao and Zhao, 2014; Zhu etal., 2019)

Defenders of state ownership argue that state-owned enterprises (SOEs) enjoy thepreferential privilege of granting appliances to solve market failures through pricingpolicies in which marginal social costs have already been taken into account.Furthermore, the government acts as the sole or superior owner, so there is no free riderproblem in management monitoring, as seen in the scattered ownership structure of non-state-owned companies (Yarrow et al., 1986) In turn, it results in lower agency costs

than non-state-owned enterprises Furthermore, some empirical evidence proves that inSOEs with the dual objective of social welfare and profitability, agency costs aremoderated, resulting in more profitable than their counterparties

In Vietnam, since 1992, the privatization process of state-owned companies to be listed

on the two official stock exchanges has been put into practice The reason forimplementing this process is the weakness of the staff, board of management, andtechnology in these enterprises The term "state-owned enterprise" in this study is used torefer to originally state-owned companies (Equitized SOEs) that undergo theprivatization process and get listed on the stock market with significant privileges fromthe state (Xiaowen Tian, 2007; Hai & Nunoi, 2008; Karen & Xiaoyan, 2020).Distinguished from their peers in SOEs, the state maintains a high proportion of thesecompanies with representatives on the Board of Directors, where one is voted to becomethe CEO of the company (Mc.Gee, 2009; Weihuang, 2011) In SOEs, there are doubleagency problems, including "vertical agency problems" both between the executives andstate owners (in fact, the public in general) and between the agent and other shareholders

in the company, together with "horizontal agency problems" between state and non-stateowners (Zhu et al 2019) in which the former may expropriate the latter

2.1.3.2 Agency cost and firm performance in non-state-owned enterprises

It is believed that the most classical form of organizational structure is family enterprises,which is prevalent in contemporary economics with roughly two-thirds of non-state-owned businesses having the origin of family businesses worldwide (Neubauer andLank, 1998) In fact, agency theory (Fama and Jensen, 1983) reckons that since in non-state-owned firms, ownership and management incentives are allied, or maybe due to thesuperior monitoring capabilities of major owners, agency costs are low In line with thisargument, private-owned enterprises are associated with kinship, so such a close bloodrelationship helps to eliminate the interest conflict and reduce agency costs (Kim andGao, 2013; Wangfeng et al 2016)

The agency costs arise from interest conflicts and information asymmetry (Jensen andMeckling, 1976) Enterprises can be considered as private property with the consistentobjectives of agents and the whole enterprise, which eliminates the agency tension frombenefit disagreement (Fama and Jensen, 1983; Cheng, 2014) As for the information

asymmetry, the mutual communication and coordination among private members isstrengthened to alleviate agency costs (Fama and Jensen, 1983; Daily and Dollinger,1992).

However, although private owners are usually actively involved in firms’ management,serving as directors and or managers, and privately-owned firms have fewer severeagency conflicts between owners and managers, they have more severe agency conflictsbetween family owners and non-family minority shareholders In addition, the sameopinion is shared that dominant private ownership reduces the negative impacts ofprincipal-agent conflicts while exacerbating the negative impacts of principal-principalconflicts on shareholder value (Purkayastha and Veliyath, 2019)

2.2 STATE-OWNERSHIP AND FIRM PERFORMANCE: THEORY AND EVIDENCE

2.2.1 The role of state ownership

The controversy over the effectiveness of state ownership has drawn special attentionfrom academic society The arguments against state ownership are strengthened by fourmain theories, comprising agency theory, property right theory, public choice theory, andthe grabbing hand theory They all indicates that SOE’s objectives are focused on socialwelfare maximization and self-interested governments When state participation is largeenough, managers are often representatives of the government They are likely to workmore as bureaucrats to fulfill social responsibilities than as managers who attempt tomaximize shareholder value Seriously, they could take advantage of their power toincrease private benefits directly from the firms or from changes in share values in thecapital market Thereby, this type of ownership concentration, with its diverse set ofcontrol mechanisms, does not provide appropriate protection for minority investors(Shleifer and Vishny, 1997)

2.1.4 State involvement in listed firms

Academic society has paid special attention to the subject of state ownership.Nevertheless, the empirical evidence for the rapport between state ownership and firmperformance has been conflicting and inconsistent A majority of studies confirm thatstate participation has a negative relationship with operating performance (Konings,1997; Lin, Ma, and Su, 2009; Tran et al., 2014) However, other research confirms that

state ownership influences firm performance positively (Jiang, Laurenceson, and Tang,2008; Le and Buck, 2009) Furthermore, others conclude that state equity ownership has

a U-shaped relationship with firm performance (Wei, Xie, and Zhang, 2005; Hess,Gunasekarage, and Hovey, 2010; Yu, 2013) However, Sun, Tong, and Tong (2002) aswell as Phung and Hoang (2013) reveal that state involvement has an inverted U-shapedrelationship with market performance It is reasonable and valuable for the vitality offirm performance to receive government support and political connections Therefore,the relationship between state ownership and firm performance is unresolved

CHAPTER 3 DATA AND METHODOLOGY

3.1 RESEARCH DATA

The listed non-financial companies in Vietnam are the subject of this study The samplesize consists of qualified listed companies on both the HOSE and HNX stock exchanges,with the exclusion of unlisted companies from UPCoM or OTC to represent the officialmarket The starting date for the data is 2008 due to insufficient data in the period prior

to 2008, along with the officially taking effect of the Law on Securities in 2007 Thisstudy uses the Industry Classification Benchmark (ICB) as a criterion for industryclassifications such as oil and gas, basic materials, industrials, consumer goods, healthcare, consumer services, telecommunications, utilities, financial services, constructionand real estate, and technology It is noticeable that banks, insurance, and financialservices companies are kept out due to their belonging to financial industries withdissimilar financial statements and characteristics Furthermore, data from companiesthat break the information disclosure regulations, are under the unusual supervision ofthe Vietnamese State Securities Commission, or are subject to merger and acquisition, iskept out for quality assurance

3.2 RESEARCH VARIABLES

Variables include internal and external factors Internal factors are the ones arising frominside of the companies itself namely agency cost, state ownership capital structure, salesgrowth, profitability growth, investment opportunity Furthermore, companies doingbusiness within a specific country's boundary will be affected by the economy and